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SPRING VALLEY FOREST PRODUCTS CORPORATION

Upon returning from his annual twoweek vacation in early July of 2002, the treasurer of the Spring Valley Forest Products Corporation, a Mr. Fred Firr, found the firm's audited balance sheet as of June 30 on his desk. Close scrutiny of the company's financial condition as reported in this document suggested to Mr. Firr that the cash flow picture for the enterprise was deteriorating. In times gone by, the firm had been able to maintain sizeable cash balances in its bank of account, Tippecanoe Trust Company, during the major portion of the fiscal year, and had found only modest seasonal borrowings necessary. Recently, however, a lengthening of credit terms to customers necessitated by intense competition in the company's dominant product lines had increased working capital needs quite substantially. Simultaneously, lower selling prices occasioned by the same competition had diminished profit margins. For these reasons, Mr. Firrwho had starred as a quarterback in high school, felt that a careful forecast of funds needs for the remainder of 2002 was in order.

Spring Valley Forest Products (SPRIVORPCO) produced plywood paneling and moldings both for lumber wholesalers and major contractors in the north central Indiana area. The verdant Wabash River Valley had proven capable of supporting the lush growths of timber necessary to the company's production activities. Most lumber, however, was purchased from independent farmers and lumbermen rather than grown by the company itself. Raw material costs, therefore, were relatively high in relation to sales. The firm's products, marketed under the brand name SPRIV, enjoyed an unvarnished reputation for quality.

In making his forecasts for the period July 1 through December 31, 2002, Mr. Firr estimated that the pattern of monthly sales was likely to be of the form:

July August September October November December $120,000 100,000 60,000 60,000 140,000 200,000

The bulge in sales in November and December was attributable in part to a large order that had just been placed by a regional buildingsupply chain for prefinished interior paneling designed for the home handyman market. Shipment had been agreed upon for the latter part of the year.

Of the total sales indicated, only 10 percent were expected to be for cash. Collections on the remainder were anticipated generally within 60 days of sale. In particular, recent experience had suggested that roughly onehalf of credit sales were collected for during the month following the month of sale and that other onehalf during the next subsequent month. Mr. Firr intended to use this pattern as the basis for his calculations.

SPRIVORPCO'S woodlot management group had entered into commitments with various timber growers in anticipation of the sales expected. Specifically, they planned to purchase hardwood timber in bulk according to the following schedule:

July August September October November December $50,000 50,000 70,000 40,000 30,000 30,000

The cash payments for these deliveries would occur, in all cases, one month later.

Labor costs were forecast at the same level as purchases, and were expected to follow an identical monthbymonth pattern. Because of the need to pay wages weekly, however, the cash outlays for labor costs ordinarily took place in the same month the costs were incurred, rather than with a time lag.

The company's general, selling, and administrative expenses had been running at a rate of $10,000 per month during early 2002, and were predicted to continue at that scale in the near future. The associated cash payments, like those for labor costs typically occurred with no appreciable time delay. Depreciation charges amounted to $3,000 per month, as did miscellaneous cash expenses. On the horizon, however, was a special outlay for pollution control equipment that would be necessitated by new regulations soon to be imposed by the Wabash Valley Watershed Authority on emissions from sawmill operations. These would call for the installation of a woodchip recycling facility costing $80,000 in midNovember. Terms from the supplier were net, 30 days. Depreciation on the equipment would come to approximately $2,000 per month, starting with November. In December, the company planned to retire from its books a fully depreciated debarking crib which had originally cost $30,000, and which was no longer used in the firm's operations.

As matter of policy, Mr. Firr felt that SPRIVORPCO should maintain a minimum cash balance of $50,000 in its account for normal transactions needs. His brother, Douglas, who was the loan officer at Tippecanoe Trust Company (TIPTCO), indicated that this sum would satisfy the bank's desires for compensating balances. A cash dividend of $20,000 to common stockholders was contemplated for December. Mr. Firr hoped to be able to make the payment, since he regarded it as valuable "seed money" for attracting possible new equity capital to the business in the future. On the basis of operating results for the first six months of 2002, a charge of 75 percent of sales as cost of goods sold seemed appropriate for the second half of the year in drawing up any pro forma income statements. Traditionally, cost of goods sold for SPRIVORPCO encompassed only timber purchases and labor costs. Other expenses, like those for sales and administration, were separated out in the financial statements.

In the event, SPRIVORPCO turned out to require a loan greater than its existing bank was willing to provide, Mr. Firr was confident he could obtain additional financing from a larger metropolitan bank with whom he had recently made certain preliminary contacts. That bank, Tulane Liberty Security (TULIBS), did a considerable volume of business with firms in the northern Indiana area already and seemed generally sympathetic to Mr. Firr's financial plight. Hence, he felt that, whatever the cash forecast showed, he could arrange the requisite loans by supplementing the support of TIPTCO through the TULIBS bank.

Assignment:

Prepare a Pro Forma Income Statement for Spring Valley Forest Products for the interval, July 1, 2002 December 2002. Prepare a Pro Forma Balance Sheet for December 31.

Prepare a Cash Budget for the month of December.

Derive, from the statements above, a SourceandUse of Funds Statement for the full period 7102 to 123102.

Assume the relevant corporate income tax rate to be 50%.

Spring Valley Forest Products Balance Sheet: June 30, 2002 Cash Accounts Receivable Inventories Plant and Equipment Less: Accumulated Depreciation Net Plant and Equipment Other Assets Total Assets Accounts Payable Tax Accruals Miscellaneous Accruals Common Stock Retained Earnings Total Liabilities and Owners Equity Arising from income during the first six months of the year. Payable in full on September 15, 2002. Taxes accrued during the last half of 2002 will be payable on March 2002 $65,000 140,000 180,000 300,000 (75,000) 225,000 60,000 $670,000 60,000 30,000 70,000 150,000 360,000 $670,000